A district court ruling potentially worth hundreds of millions of dollars to craft brewers is going to make it tougher for the Texas Legislature to pass regulatory laws without sufficient cause.
Travis County District Judge Karin Crump on Thursday, August 26, 2016 ruled that Senate Bill 639, passed in 2013 prohibiting craft brewers from negotiating their distribution rights, violated the Texas Constitution.
Institute for Justice attorney Matt Miller argued the law, which gave beer wholesalers the right to sign and profit from exclusive distribution agreements, deprived the creators of the product from realizing its full value.
The Texas Attorney General’s office, representing the Texas Alcoholic Beverage Commission in the case, has 30 days to appeal Crump’s decision.
Miller built his case for Live Oak Brewing Co. of Austin, Peticolas Brewing Co. of Dallas and Revolver Brewing in Granbury, southwest of Fort Worth, on the violation of the brewers’ economic liberty guaranteed in Section 19 of Article 1 of the Texas Constitution.
The Institute for Justice won a case on the same grounds before the Texas Supreme Court in June 2015 in a broadside of the state regulation of eyebrow threading, the arcane trade of eyebrow hair removal.
“I think what we’ve shown in both cases is that when the state regulates there are limits to what is allowed under the Texas Constitution,” Miller told Watchdog on Friday. “Courts are going to have to take a serious look at whether or not there is some real world connection to some governmental or public interest.”
The case of the craft brewers was little more than protectionism on behalf of a handful of companies that control almost all of the beer distribution in Texas, Miller said.
Five of those companies, all of them located in Houston or Dallas, are among the 20 biggest beer distributors in America. Silver Eagle Distributors of Houston and Ben E. Keith Beverages of Dallas were ranked two and three respectively.
Until the 2013 legislative session, brewers of up to 40,000 barrels of beer (a barrel is 31 gallons) were allowed to distribute their own beer. But because the Legislature saw fit to prohibit them from building satellite warehouses, most small brewers relied on distributors.
With the craft beer explosion, companies jockeyed for and in some cases paid the brewers handsomely for their exclusive distribution rights. Live Oak, one of the plaintiffs, had signed a deal for $250,000 to have its award-winning beers sold in Houston, Miller said.
The Wholesale Beer Distributors of Texas changed the bargaining equation by helping to write and persuading state Sen. John Carona, R-Dallas, then-chairman of the Senate Committee on Business and Commerce, to introduce SB 639.
The bill not only barred small brewers from negotiating, it essentially granted distributors exclusive sales territories in perpetuity without compensation, Miller said.
In the year prior to the session, the Wholesale Beer Distributors of Texas gave by far its largest ever total of contributions, $23,500, to Carona, according to records on Follow the Money.
The distributors gave similar contribution bumps to the bill’s co-authors and sponsors.
For his efforts, Texas Monthly named Carona one of the state’s worst legislators for the session. The wholesalers, having gotten what they wanted, reduced Carona’s contributions to $7,500 in 2014, the year conservative novice Donald Huffines ended his nearly 20-year career in the Senate.
Before that year was out, the Institute for Justice filed suit to overturn the law.
“I think this decision sends a message to distributors that they can’t just go to the Legislature and get a law passed,” Miller said. “My clients are over the moon about this.”
Those craft brewers who signed their agreements after the law was passed remain considerably under the moon. The ruling, Miller said, allows for brewers to negotiate with distributors. It does not rescind agreements.
“The value for those distribution rights,” Miller said, “are gone.”
